Continuing Series: Exploring the IRS Examination Guide for Multiemployer Benefit Plans
Expect these questions to be among those your next IRS auditor asks. Following the questions are comments and suggestions.
"Has the plan engaged in office leases or sales, or sharing of administrative services, with the sponsoring union?"
When a fund shares office space, personnel, equipment, and other expenses with other funds and/or a labor union, it is common for certain expenses to be allocated among the funds and union. ERISA §408(b)(2) and PT Exemptions 76-1 and 77-10 allow these transactions to avoid prohibited transaction penalties if certain criteria are met, including:
a. the costs of securing shared office space, services, and goods are assessed and paid on a pro rata basis with respect to each party's use of the space, services and goods, and
b. the plan maintains appropriate records.
On audit, IRS and DOL will look at those records, and challenge whether the allocation of expenses is reasonable and in proportion to each fund's use of the space, goods, and services. Avoid problems by reviewing these areas now!
For each category of shared expense, measure how much benefit each fund receives. Allocate payroll and related expenses based on how each person's time is spent. Allocate rent and occupancy based on floorspace used exclusively by each fund. Keep a log at the postage meter, or estimate postage allocations based on approximate volume handled by each fund. Allocate compute rental, and compute operators' costs based on CPU statistics, or other reasonable estimates. No single allocation method is required, so long as the results are reasonable and defensible. The key is to do the work now, and support your allocation policy is writing, with appropriate workpapers and statistics. Secondly, review the allocation methods periodically, as the plans' operations change. If your last allocation study was more than two years ago, update it now.
Consider engaging an independent accountant to develop allocation methods. The study will carry more weight than if it is performed in-house, with your staff, and your accountants can then audit the allocation without having had a major role in devising it. (If you don’t have a written allocation agreement among your funds, see Sample expense allocation agreement)
" Have administrative expenses been properly incurred? Look for evidence of abuse, e.g., spouses accompanying plan trustees on plan business at expense of plan, etc. Consider referral to DOL, as necessary."
Both the IRS and DOL are closely scrutinizing expense reimbursements to officers and trustees. Cover yourselves by adopting a formal reimbursement policy, require documentation of all reimbursed costs, and require appropriate review of all expense reports for compliance with the policy. Document trustee approval for all out of town travel expenses. If the fund advances money before the travel, don’t advance more than 30 days before the event, make sure that a complete accounting is made, and that any monies not supported by receipts are reimbursed to the funds. Be sure that fund assets are only used for fund purposes. Especially watch for costs of spousal travel; in most cases, DOL will not allow any payment of spousal costs from fund assets. For more information on trustee expenses, see the March ‘98 issue of Employee Benefits Digest (IFEBF).
"Has the plan extended credit to a contributing employer by not enforcing collection of required contributions?"
If a reasonable effort is not made to collect delinquent contributions pursuant to established procedures, or failure to collect is the result of an arrangement, express or implied, between fiduciaries and the delinquent employer, failure to collect may be deemed to be a prohibited transaction. The '96 Tax Act increased first tier tax from 5% to 10%; second tier tax is still 100%.
( I will have more on collection activities in a future issue.)
"Have any assets been transferred between the plan and any affiliated plans?"
The examiner will probably ask to review the balance sheet of affiliated plans. Some plan trustees may believe that shifting assets among pension and welfare trusts is permitted, because CBA's often treat employer contributions as "one pot of money" to be used for a variety of purposes. However, shifting trust assets is a prohibited transaction, and Taft-Hartley specifically requires retirement amounts to be segregated in a separate trust.
Some plans have tried to skirt these rules by having one fund sell an asset to a third party, and then having the other related fund purchase the asset. Or, a plan will sell the "administrator’s" car to a dealer, and the administrator will then purchase the car from the dealer. Even if this is done at fair market value, it is a prohibited transaction, and the auditors are looking for it.
